Broadcom co-founder indicted by feds

By THE ASSOCIATED PRESS

Jun 06, 2008 | 10:18 AM

SANTA ANA, Calif. - Broadcom Corp. co-founder Henry T. Nicholas III was indicted on federal narcotics charges that include allegations he slipped ecstasy into the drinks of business associates, maintained a drug warehouse and concealed his illegal conduct with bribes and death threats.

The indictments paint a bizarre picture of a successful entrepreneur, who allegedly used much of his fortune to fund drug parties and orgies in airplanes and luxury homes and to build a secret tunnel and room beneath his mansion in Laguna Hills.

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In a pair of indictments unsealed Thursday, the billionaire also is accused of committing conspiracy, securities fraud and other violations while he led the Irvine-based computer chip company.

Broadcom was eventually forced to write down its profits by $2.2 billion in January 2007, believed to be the largest-ever restatement related to improperly accounting for backdated options.

After a three-hour hearing Thursday, U.S. Magistrate Judge Arthur Nakazato ordered Nicholas released on $3.3 million bail. He also ordered random weapons searches and drug tests by the government, home detention, electronic monitoring and the disabling of Nicholas' two private planes.

Nicholas, 48, in handcuffs and wearing gray slacks and a white shirt with no tie or belt, nodded vigorously when asked if he agreed to the conditions of release.

An arraignment hearing was set for June 16. Nicholas did not enter a plea.

"It's a kitchen-sink attack on Dr. Nicholas. They're trying to throw everything at him from eight years ago," Craig said.

Also indicted on the stock-option backdating was Broadcom's former chief financial officer, William J. Ruehle. He was not charged with the drug violations.

Ruehle, 66, was released on $2.6 million bail and surrendered his passport, although he will be allowed to take three international trips that were already planned. He will also be arraigned June 16.

"It is critical to maintain the transparency of our financial markets, something that these defendants allegedly attempted to manipulate through the scheme, which created a false picture of Broadcom's finances," U.S. Attorney Thomas P. O'Brien said in a statement.

Broadcom, which makes microchips for cell phones and broadband Internet devices, reported a strong first-quarter profit in April and forecast second-quarter sales of $1.08 billion to $1.13 billion, ahead of Wall Street expectations.

The 18-page indictment on drug charges alleges that Nicholas kept four properties in Orange County and Las Vegas, including a warehouse in Laguna Niguel, Calif., where he stashed and distributed cocaine, methamphetamine and ecstasy.

He later remodeled the warehouse with private rooms and furnished it with art and high-end electronics.

The court documents also claim Nicholas hired prostitutes and escorts for himself, his employees and customers and conspired to get illegal prescriptions for drugs such as Valium.

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In 2001, Nicholas smoked so much marijuana during a flight on a private jet between Orange County and Las Vegas that the pilot had to put on an oxygen mask, the indictment states.

Nicholas also required his unnamed coconspirators to provide detailed invoices for drugs they sold to him, and used code names such as "party favors" and "refreshments" to conceal what was being sold, prosecutors alleged.

The allegations recall two earlier civil lawsuits filed against Nicholas that accused him of rampant drug use and hiring prostitutes. One lawsuit was cited by prosecutors in a motion filed Thursday that sought to deny bail for Nicholas.

That suit was filed by Nicholas' former bodyguard and personal assistant, Kenji Kato. A second lawsuit was filed last year by a construction crew that claimed they were hired to build an underground lair for Nicholas where he could indulge in sex with prostitutes and drug use.

The workers claimed Nicholas failed to pay them millions of dollars and used intimidation and death threats to prevent them from leaving the project, which was kept secret from Nicholas' wife and city inspectors.

Nicholas faces a total of 21 counts in both federal indictments filed this week, while Ruehle faces 21 counts in the stock options indictment.

Backdating stock options, which often are granted as hiring and retention incentives, is legal. Companies across the company have run into trouble when they failed to account for the true cost that the backdating created because omitting that cost sometimes inflated the companies' income.

The drug charges against Nicholas carry a maximum combined sentence of 20 years in prison. He could face up to 340 years in prison on the stock backdating charges.

Ruehle could face up to 370 years if convicted of all the charges against him.

Last month, securities regulators cited Nicholas, Broadcom co-founder Henry Samueli and Ruehle in a civil suit alleging they falsified the company's reported income. The SEC also cited Broadcom general counsel David Dull, but Dull and Samueli were not named in Thursday's criminal indictments.

Nicholas served as CEO and president from Broadcom's inception in 1991 until he resigned in 2003.

Ruehle joined the company in 1997 as vice president and chief financial officer and retired in 2006.

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Samueli, Nicholas' one-time Ph.D. adviser, stepped down as chairman of the company's board of directors after the SEC action last month.

Broadcom shares rose 65 cents, or 2.3 percent, to $28.75 Thursday, amid a general upswing in the stock market. They have traded between $16.38 and $43.07 in the last 52 weeks.